By Chris Taylor, Manager of the Neptune Japan Opportunities Fund
H1 2014
- Economy: after a harsh winter that slowed activity in the economy, the main event of the first half of the year has been the debate over what impact the 1 April VAT hike from five to eight per cent would have; we are optimistic. The overriding positive is that both wages and land prices have started rising again. The Japan Trade Union Confederation (Rengo) reports base wages are growing by 2.2 per cent year on year (and 5.7 per cent year on year including bonuses), which will help drive sustainable inflation and a revival in the domestic part of the economy.
- Politics: the government passed a record regular budget of Yen 100 trillion and a special supplementary budget of JPY5–7tn to offset any short-term negative impact from the VAT hike. Towards the end of the period, prime minister Shinzō Abe announced his ‘New Growth Strategy’, which included proposed corporate tax cuts and tax code adjustments to encourage more women to work.
- Corporates: earnings for the year ending 31 March 2014 showed a dramatic ongoing improvement from the previous year with average aggregate growth of around 75 per cent. We expect continued strong earnings growth for the next year supported by the new government’s policies, as will further Yen weakening and OECD-based economic resurgence.
H2 2014
- Economy: we expect the economy to successfully overcome the recent VAT hike and to continue improving, buoyed by a combination of increased government spending and the benefits of easy monetary conditions, recovering world growth and a weaker Yen.
- Politics: we look forward to the ongoing reassessment of the Government Pension Fund’s (GPIF’s) JGB-centric asset allocation. The largest pension fund in the world, with around $1.25tn of assets, has significant scope to increase its equity allocation. Additionally, a second tranche of monetary easing is likely in the autumn, which should further weaken the Yen. Most importantly, Abe still enjoys political support that is unparalleled historically, which enables him to pursue his crusade to end deflation.
- Corporates: aside from ongoing earnings growth, we expect to see an increased focus on corporate governance and shareholder returns. Japanese corporates continue to reap the benefits of decades of corporate restructuring, significantly lowering break-even rates. Now a heightened focus on shareholder returns will likely see a ramp-up in dividends and buybacks. This chimes nicely with the recently launched Japanese NISAs encouraging retail equity participation, which is at shockingly low levels.
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